A Secret Deal Between Wall Street and Washington Shines a Harsh Light on Federal Housing Agency


While the Federal Trade Commission was receiving gut-wrenching documentation of predatory lending abuses at a unit of Citigroup, the Federal agency mandated to level the playing field for low income homeowners, the U.S. Department of Housing and Urban Development, was quietly awarding 19,968 mortgages of homeowners in distress to Citigroup to dispose of as it saw fit.  HUD legally became Citigroup’s joint venture partner in at least two of the deals, retaining a minority interest.

On March 6, 2001, the FTC brought suit against Citigroup, CitiFinancial Credit Company and two firms it had acquired (Associates First Capital Corporation and Associates Corporation of North America) charging them with engaging in deceptive and illegal lending practices.

The FTC had substantive evidence that a culture of incentivizing an aggressive sales force to pile predatory loans onto unsophisticated borrowers was an enshrined business model at Citigroup’s consumer lending unit.

On July 20, 2001 a former Assistant Manager for CitiFinancial, Gail Kubiniec, testified as follows to the FTC:

“At CitiFinancial, emphasis was placed on marketing new loans, particularly real estate loans (loans secured by a home mortgage), to present borrowers of CitiFinancial.  Employees would receive quarterly incentives, called “Rocopoly Money,” based on how many present borrowers they ‘renewed’ (refinanced) into new loans…Typically, employees would only state the total monthly payment amount in selling a proposed loan.  Additional information, such as the interest rate, and the financed points and fees, closing costs, and ‘add-ons’ like credit insurance, were only disclosed when demanded by the borrower…It was also common practice to try to sell borrowers the largest loan possible…All CitiFinancial branch offices had quotas for the sale of credit insurance…Loans were typically presented to consumers with ‘100% coverage,’ meaning that real estate loans were presented with at least credit life and disability already included, and personal loans were presented with at least credit life, disability, involuntary unemployment, and property insurance already included.  When quoting the monthly payment, I frequently quoted the payment with coverages already included, telling the consumer only that it was ‘fully protected.’ This was a common practice used by employees at CitiFinancial…The pressure to sell coverages came from CitiFinancial’s Regional and District Managers.  Each branch had monthly credit insurance sales goals to meet…If these goals were not met, the District Manager would call and put pressure on the Branch Manager to get the branch up to par.”

Also in the trove of documents at the FTC, a series of Faxes to the sales force from one CitiFinancial manager, Mike Moniot, had the creepy feel of a Survivor-type reality tv show:

“Fax dated December 30, 2000: ‘…The manager must personally attempt to sell the loan while the customer is still on the phone if our offer is rejected when the employee pitches it.  No call backs.  Manager must get on the phone immediately.  I expect to see notes from the managers on the results of their attempt.  It makes sense for managers, our best salespeople to pitch the most difficult sales…’

“Memorandum dated June 12, 2001: ‘Good morning ladies and gentlemen.  Today is the day we must rally on real estate.  Our team has booked 7 R/E loans this month.  This is a pathetic number folks. I will be calling you for your commitment this am…’

“Fax dated June 26, 2001: ‘Enough is enough ladies and gentlemen.  We did not achieve the improvement I hoped for last week.  The following is in place effective today for the remainder of this month: Tom Politano, Cindy Lee: You are substantially below the min $/1000 level. You will personally close all personal loans the rest of this month…’

“Fax dated July 2, 2001: “The transfer by zip code of former Associates accounts was processed over month end…We have a contest in place for July to determine who does the best job of renewing these accounts.  I will award points for renewing transferred accounts…The branch with the most points earns a day off for each employee in August.’”

The FTC also had testimony from Michele V. Handzel, a former Branch Manager for CitiFinancial:

“CitiFinancial put much more pressure on employees than the Associates did to include as many credit insurance and ancillary products as possible on every loan….In fact, I feel that the credit insurance sales practices at CitiFinancial were worse than at The Associates.  From January to June 2001, the policy was that no personal loan at CitiFinancial would be approved if it did not include some type of credit insurance, nor would a real estate loan be approved without some type of ancillary product…There were several internal measures in place to effectuate this policy.  For instance, District Managers would frequently refuse to send a loan to underwriting if it did not include some type of insurance product.  Moreover, loans that were closed and did not include any insurance would be identified by CitiFinancial’s internal insurance auditors, and the employee who closed the loan would be written up…Closings at CitiFinancial resembled those at The Associates – they were brief.  Personal loan closings took approximately 10 minutes.  Real estate loan closings took a little longer but also did not provide a lot of details about the loan.  At CitiFinancial, I was instructed to do a ‘closed folder’ closing, meaning that information would be discussed orally first.  Only after the borrower indicated that he wanted to sign would the employee open the folder and have the borrower sign the papers.”

Around this same time Citigroup was running a “Live Richly” ad campaign conceived by ad agency Fallon Worldwide.  According to Citigroup, the campaign was to communicate “that Citi is an advocate for a healthy approach to money.  Citi is an active partner in achieving perspective, balance, and peace of mind in finances and in life for its customers.”

In reality, the dark underbelly of the consumer lending divisions of Citigroup was  creating a torrent of mail to federal agencies and members of Congress:

On April 22, 2001, a resident of San Antonio, Texas wrote:

“I ask for you help.  Federal law and regulations are being violated intentionally in CRIMINAL, perhaps RACKETEERING, manner by a spaghetti-like entanglement of corporations…I refer to Sanford Weil[l]’s Citigroup…The particular criminal activity is that, despite federal law & regulation, despite what is written on its customers’ statements, Citigroup/Universal Card refuses to abide by mandated policy about the purchase of defective merchandise…”

On August 28, 2001, an Ohio woman wrote to HUD as follows:

“This will be my 3rd request for someone from this dept to assist me.  I am a victim of predatory lending.  Citifinancial gave me a loan at 24.99% in June of ’99.  I had a perfect credit score. The[y] called me back into their office one week later.  Refinanced that same loan at 18.99% and had a check for $500.00 waiting for me…this time they told me that I had to use my home as collateral to get the lower interest rate…I feel that because I am a female and black that they…thought they could get away with this…”

A distraught woman in Enid, Oklahoma wrote to her Senator, James Inhofe:

“…We had paid our home loan off in full…The new loan…was in the amt. of $24,139.20.  This was a rehabilitation loan for our home. The first problem occurred when we wanted to hire L.E. Clark as our General Contractor.  The loan officer (whose name is Audrey) said that we had to use B&K Home Improvement Inc. as our contractor.  We told her that we did not want B&K. We knew Mr. Clark and his work.  She said that it was none of our business.  She had hired B&K and if my husband called back she would file harassment charges…We were supposed to co-sign a check to B&K every ¼ of work approved.  Audrey gave B&K ¾ of money up front.  This was done without our knowledge or consent…at this time we are desperate…We are living in our ‘gutted’ house which is actually unlivable but we had no choice.  Any help that you can give us would/will be very much appreciated.  You are our last hope.  We have tried everything.”

Was there any evidence to support the premise that CitiFinancial was targeting minorities and the vulnerable?  Absolutely.  According to their former Assistant Manager, Gail Kubiniec:

“I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level.  If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the coverages CitiFinancial offered.  The more gullible the consumer appeared, the more coverages I would try to include in the loan…”

The FTC settled their suit on September 19, 2002 for $215 million.  But the press release issued by the FTC made it appear, incorrectly, that the abuses stemmed from The Associates firms that Citigroup had acquired when the evidence clearly demonstrated that CitiFinancial was fully holding up its end of the predatory brotherhood.  The press release quoted Timothy J. Muris, Chairman of the FTC at the time: “I am pleased that Citigroup has agreed to remedy the grave injury caused by The Associates and that Citigroup has announced new measures at CitiFinancial aimed at preventing these kinds of problems.”

Just one month later, HUD would make its second award to Citigroup in as many years, handing over 6,656 mortgage loans insured by HUD sibling, FHA, of people experiencing financial hardship and delinquent on their loan payments.  HUD left the decision in Citigroup’s hands as to whether to foreclose, sell off the loans en masse to other investors (securitization), or restructure the loans.

The HUD mortgage sales in 2002 though 2005 are a stark departure from HUD’s stated mandate of helping low income people remain in their homes during periods of financial hardship.  Even the controversial sales HUD made in the 90s that eventually erupted into charges and counter-charges of improprieties had many built-in protections that do not appear to have been present in the current round of sales.

According to a June 1999 report from the U.S. Government Accountability Office (GAO), “Homeownership: Information on Single Family Loans Sold by HUD,”  the purchasers were required by HUD “to offer borrowers the same forbearance, or lower loan payments, that HUD was required to offer before the loans were sold.”  To monitor that the purchasers were actually honoring the protections contained in the loan sales agreements — including reduced mortgage payments — HUD conducted reviews of loan servicers and established a toll-free telephone complaint line for borrowers whose loans had been sold.

That contrasts with the current program which states that the private partners “determine how best to maximize the return on the loan…Loans liquidated through note sales generally earn a higher return than property sales, so the JV [joint venture] has an incentive to maximize the share of note sales relative to property sales.”

Turning over a swath of a critical social policy mandate to the piranhas of Wall Street who have demonstrated an unprecedented knack for financial incompetence except in the realm of campaign donations, is clearly a matter for congressional subpoenas and testimony under oath.  Both Congress and the public at large will be more cognizant of the escalating devastation to lives and property values by making the time to watch Andrew and Leslie Cockburn’s emotionally-gripping film, American Casino.

Despite repeated requests over the past ten days to Lemar Wooley in the Public Affairs Office of HUD, Kathleen Malone, Director of the Office of Asset Sales, and John Lucey, Deputy Director, HUD refuses to confirm the names of the winning bidders and co-bidders of distressed single family mortgage sales that stretched from at least 2000 through 2005.

In addition to the awards reported in the first part of this series (see Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, CounterPunch, October 5, 2009), we have learned from outside sources that a division of Citigroup also received a bid award in 2000 consisting of 8,503 loans.  As we previously reported, Lehman Brothers (now bankrupt) won a 2003 award and Bear Stearns (rescued by JPMorgan Chase and the Federal Reserve) won a 2005 award.

Deborah Leggett found out the hard way that HUD, a taxpayer funded agency legislatively mandated to serve the public interest, had joined ranks with the “heads I win, tales you lose” swashbucklers on Wall Street.  In a desperate legal battle to save her home that stretched from 2005 through February of this year, HUD and its joint venture partner Citigroup, using the alias of SFJV-4 (Single Family Joint Venture 2004), buried Ms. Leggett under motions, briefs, counter-claims and even a request for sanctions in the United States District Court for the Northern District of Texas.  According to their own record put before the court on November 11, 2008 they did not offer Ms. Leggett the HUD required protections of an effort for loan modification or forbearance prior to moving for and obtaining foreclosure.  Indeed, Ms. Leggett’s attorney quoted counsel from the other side stating that they could not even produce the mortgage note as proof they even owned the property (raising the question as to whether the property had already been sold off to investors in a securitization).

Ms. Leggett lost her court battle as well as her home and was evicted.  There is nothing in the court record to suggest that Ms. Leggett ever knew her court adversary was her own government.

We’re still lynching people in America.  It’s not a physical lynching, it’s more nuanced now.  Today, the noose is a stack of indecipherable loan papers or a court order compelling one to hand over your home and your dignity to a Wall Street bank that robbed you just because it could; that stripped you of your hope and aspirations just because your government did not stand in its way or, as here, joined forces.

PAM MARTENS worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

Pam Martens has been a contributing writer at CounterPunch since 2006. Martens writes regularly on finance at www.WallStreetOnParade.com.

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